Budget deal trims federal pension benefits

By Matthew Heimer

Conservative advocacy groups and other budget hawks have dismissed this week’s federal budget deal because it doesn’t make any significant cuts to that Terrible Twosome of federal spending programs, Social Security and Medicare. But the pact, announced late Tuesday by House Budget Committee Chairman Paul Ryan (R, Wis.) and Senate Budget Committee Chairman Patty Murray (D, Wash.), will still reduce benefits for some retirees: If passed in its current form, it’ll trim spending on federal pensions by about $12.2 billion over 10 years.

Reuters

Their pact trims some federal pensions.

The deal would require any federal employee who starts work after Jan. 1, 2014 to contribute more of their salaries to their pensions than current employees do. Their minimum contribution would rise from 3.1% of salary, the current level for new hires, to 4.4%, according to Kellie Lunney of the trade publication Government Executive. The increase registers as a benefit “reduction” because the employees will be paying more to get the same-sized retirement benefit.

(Most participants in the Federal Employee Retirement System—those hired before 2012–pay less than 1% of their salaries to the pension fund; participants in the Civil Service Retirement System pay considerably more.)

Military retirees under age 62 who qualify for pensions, meanwhile, would see their annual cost-of-living adjustment gradually reduced between now and 2016, to the inflation rate minus 1 percentage point. (The cuts don’t apply to veterans who retired due to injury or disability.) Retirees would recoup some of those reductions when they reached age 62, at which point their base pensions would be adjusted upward to compensate for some of the earlier COLA reductions.

Also potentially notable for retirees: The deal would raise about $8 billion in extra revenue over 10 years by raising the premiums that companies with pension plans pay to the federal Pension Benefit Guaranty Corp., which backstops those pensions if the companies go bankrupt.

Story Conversation

About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.